UnitedHealth Third-Quarter Profit Matches Estimates

By Alex Nussbaum -
Oct 17, 2013

UnitedHealth Group Inc. (UNH), the biggest
U.S. health insurer, reported third-quarter sales below
analysts’ expectations while declining to raise its profit
projections, driving shares down the most in two years.

Net income rose less than 1 percent to $1.57 billion from a
year earlier and the Minnetonka, Minnesota-based insurer
reported per-share earnings of $1.53, matching the average of 18
analysts’ estimates compiled by Bloomberg. Revenue climbed 12
percent to $30.6 billion, UnitedHealth said in a statement
today. Analysts had estimated $30.9 billion, on average.

UnitedHealth exceeded analyst expectations in all but one
quarter over the last four years, helped by rising enrollment
and medical costs that have remained low since the recession
ended in 2009. While both trends continued in the third quarter,
the company also said profit suffered from a decline in
government Medicare payments.

“There were a couple undesirable surprises,” wrote Carl McDonald, a New York-based Citigroup analyst, in a note to
investors today. “The obvious one is that earnings were in-line
with expectations, rather than the big beats we’ve generally
become accustomed to.”

UnitedHealth fell 5.1 percent to $71.37 at 4 p.m. New York
time, its biggest drop at the close since Oct. 3, 2011. The
shares have gained 32 percent this year.

UnitedHealth is the first publicly traded health insurer to
release results this quarter. Indianapolis-based WellPoint, the
second-biggest U.S. health insurer, is due to report on Oct. 23.
Humana, based in Louisville, Kentucky, will release results on
Nov. 6.

“United didn’t have a terrible quarter, by any means,”
McDonald said. “But we can’t forget that these stocks are all
trading at or near 52-weeks highs, with valuation multiples
above historical norms, so the bar is a lot higher than it’s
been over the last couple of years.”

The company said full earnings excluding some items will be
$5.40 to $5.50 a share this year, raising the lower end of the
$5.35-to-$5.50 projection it gave in July.

Reimbursements Drag

The insurer expects Medicare reimbursements to be a drag on
results next year and sees “limited potential” for driving
down medical costs, Chief Executive Officer Stephen Hemsley said
on a conference call today. UnitedHealth’s initial 2014 forecast
will straddle the range it’s given for this year, leaving open
the possibility that earnings may not grow.

“We are focused on a number of things that we think will
drive toward the upper end of that,” Hemsley said. “But that
execution remains to be seen.”

UnitedHealth has limited its presence on the online
insurance markets rolled out this year under the U.S. Patient
Protection and Affordable Care Act. Instead, it’s been buoyed by
growth in Medicare, the U.S.-backed program for the elderly, and
Medicaid, the government-funded program for low-income
Americans. UnitedHealth also paid $4.9 billion last year to
acquire Brazil’s largest insurer.

Enrollment in the company’s medical plans, its main line of
business, grew 24 percent to 45.3 million people.

Difficult Comparison

Nonetheless, operating earnings from the insurance business
declined. The company cited cuts in Medicare reimbursements and
a difficult comparison with last year’s third quarter, when low
medical costs gave UnitedHealth an “exceptional” boost.

By contrast, earnings swelled 54 percent in the company’s
Optum division, a smaller but growing unit that manages drug
benefit plans and provides consulting services for hospitals and
other clients.

While investors may have wanted more, today’s results were
“robust,” said Sheryl Skolnick, an analyst with Stamford,
Connecticut-based CRT Capital Group.

“For our part, we see this as an extremely strong report
with no fundamental problems in the business,” she said. The
company was “firing on all cylinders.”

Earnings in 2012’s third quarter were $1.56 billion, or
$1.50 a share.

Already the largest private provider of Medicare plans,
UnitedHealth said Oct. 15 that it was extending a 15-year-old
marketing agreement with AARP, the Washington-based group
representing older Americans, through 2020.

Like other carriers, the company has benefited from a
slowdown in U.S. medical costs amid the halting economic
recovery.

Those expenses “continue to remain at suppressed levels,”
Sarah James, a Wedbush Securities Inc. analyst in Los Angeles,
wrote in a Sept. 30 note to clients. “Low utilization will be a
driver of upside across the group.”